Senate working on stimulus bill

February 2, 2009 3:27:23 PM PST

By DAVID ESPO

WASHINGTON - February 2, 2009 - --

Senate Republicans pressed for mortgage relief as well as larger tax cuts Monday as debate opened on the emergency economic stimulus measure atop President Barack Obama's agenda. Democrats came under pressure to reduce spending in the bill. "What we can't do is let very modest differences get in the way" of swift enactment of the legislation, Obama said as new layoffs rippled through the economy and the Commerce Department reported an unexpectedly large sixth straight drop in personal spending. He invited Democratic leaders to the White House to discuss changes in the $884 billion measure, in hopes of avoiding a party-line vote like the one last week in the House.

Republicans said their goal was the change the bill, not to block it. "Nobody that I know of is trying to keep a package from passing," said Sen. Mitch McConnell of Kentucky, the Republican leader.

"We need to fix housing first," he said, and officials said the GOP was coalescing behind a proposal to have the federal government assume some of the risk inherent in mortgages. The goal was to have banks lower the interest rate to 4 percent or 4.5 percent on 30-year fixed rate loans for many primary residences, by directing Fannie Mae and Freddie Mac to buy the mortgages.

The officials who described the emerging proposal did so on condition of anonymity, saying they were not authorized to discuss it.

McConnell also said Republicans favor cutting the two lowest tax brackets as a way to " put money back in people's hands directly." If adopted, that would reduce the tax rate from 10 percent to 5 percent for the first $8,350 in individual income for the current year, and $16,700 for couples. The tax rate would be lowered from 15 percent to 10 percent on income between $8,351 and $33,950 for individuals and between $16,001 and $67,900 for couples.

Obama and the Democrats favor a different approach. The legislation provides a cut of $500 for workers and $1,000 for working couples, even if they do not earn enough in wages to pay income taxes.

Separately, Democrats privately conceded they may wind up reducing spending that has come under withering fire in recent days from Republicans.

Last week, House Democrats jettisoned money to reseed the National Mall and a provision to make it easier for states to offer family planning services to the poor under the Medicaid program.

Democrats hold a commanding 58-41 majority in the Senate, but some of their more moderate and conservative members are pushing to trim spending. There was additional pressure on the leadership in the form of bipartisan amendments to reduce spending.

As a result, the outcome of the debate on the measure is far less clear than it was in the House, where leaders had the votes to enforce their will.

The political environment also has changed since House Republicans voted unanimously against the bill last week. Public opinion polls show strong support for a package of tax cuts and spending increases to remedy the worst economic downturn since the Great Depression. But Obama is now on the spot, having pledged personally to GOP lawmakers that he would make changes in the bill once it reached the Senate.

The $884 billion Senate bill is larger than the House-passed version, principally because it includes a one-year tax cut to prevent upper-middle income taxpayers from falling victim to the Alternative Minimum Tax. The so-called AMT initially was created a generation ago to make sure the super-wealthy did not avoid taxation, but inflation has expanded its reach over the years.

In all, the Senate measure provides for roughly $542 billion in spending and $342 billion in tax cuts.

Much of the spending is in the form of health care for the poor; education funds for the states to avoid the impact of their own budget cuts on schools, and more money for food stamps, unemployment insurance and worker retraining funds.

Additionally, the bill includes a down payment on two of Obama's domestic initiatives. They include expanding health information technology and providing spending and tax cuts to encourage development of new jobs while increasing reliance of alternative energy sources.

Whatever the breakdown, Republicans said there was far too much spending, and not enough in tax cuts.

Obama made his comments at the White House, where he met with Vermont Gov. Jim Douglas, the Republican vice chairman of the National Governors Association.

"If I were writing it, it might look at little different," said Douglas, trying to keep faith with Republican critics in Congress while saying his state needed help. "But the essence of a recovery package is essential to get the nation's economy moving."

The latest layoffs were announced by Macy's, the Cincinnati-based department store chain, which said it was cutting 7,000 jobs.